Koh Brothers Eco Engineering's Turnaround: Is This Singapore Construction Stock a Buy?

Koh Brothers Eco Engineering Limited (5HV.SI) has emerged from a prolonged slump with a remarkable 68% year-on-year revenue surge in H1 2025, driven by a rebound in its Engineering and Construction segment. The company's net profit of SGD 3.04 million for the first half of 2025—a stark contrast to the SGD 9.31 million loss in the prior-year period—has sparked investor curiosity. But is this turnaround sustainable, or is it a fleeting rebound in a volatile sector? Let's dissect the numbers, risks, and valuation to determine whether this Singapore construction stock warrants a place in your portfolio.

A Profitability Turnaround: Drivers and Durability

The company's resurgence is anchored in its Engineering and Construction segment, which nearly doubled revenue to SGD 81.3 million in H1 2025. This growth stems from high-margin projects like the Toa Payoh integrated development and the Changi Terminal 5 intra-terminal tunnels, a SGD 999.1 million joint venture win. The Bio-Refinery and Renewable Energy segment also contributed, with segment profits rising to SGD 5.8 million from SGD 3.5 million.

However, the durability of this turnaround hinges on two factors: project execution and cost control. The company's gross profit margin expanded from 0.7% in H1 2024 to 12.4% in H1 2025, a testament to improved pricing and operational efficiency. Yet, the construction sector remains prone to cost overruns, supply chain disruptions, and labor shortages—challenges that plagued the company in FY2024.

Valuation: A 94% Discount to Fair Value—Opportunity or Mirage?

The stock trades at SGD 0.088, a 94% discount to the Simply Wall Street model's fair value estimate. This gap is partly attributed to the company's 68.14% stake in Oiltek International, a high-growth edible oil and renewable energy firm. Oiltek's market cap of SGD 468 million as of August 2025 implies Koh Eco's stake is worth SGD 319 million—exceeding its own market cap of SGD 225 million by 40%.

This valuation misalignment raises questions: Is the market underestimating Koh Eco's core construction business, or is it factoring in historical volatility? The company's debt-to-equity ratio of 33% and SGD 64.4 million cash reserves suggest a conservative balance sheet, but the lack of analyst coverage (no third-party fair value estimates) adds uncertainty.

Risks to Consider

1. Legal and Currency Exposure: A pending arbitration case over a disputed variation claim and foreign exchange losses (SGD 2.06 million in H1 2025) highlight operational fragility. The weakening USD against the Malaysian Ringgit could further erode margins.
2. Sector Volatility: The Singapore construction sector is cyclical, with public infrastructure projects driving demand. Delays in government tenders or regulatory shifts could disrupt revenue visibility.
3. Profitability Sustainability: While H1 2025 results are encouraging, the company's FY2024 net loss of SGD 17.1 million underscores its history of unprofitability. Investors must assess whether the current order book (SGD 1.1 billion) translates into consistent cash flows.

Investment Thesis: A High-Risk, High-Reward Play

Koh Brothers Eco Engineering's valuation appears compelling on paper. A theoretical fair value of SGD 0.113 (based on its Oiltek stake alone) implies a 41% upside. However, this assumes the market eventually recognizes the company's broader asset base and executes its project pipeline without hiccups.

For risk-tolerant investors, the stock could be a speculative buy if:
- The company maintains its gross margin above 10% in FY2025.
- The Changi Terminal 5 project progresses without major delays.
- Legal disputes are resolved favorably, and foreign exchange risks are hedged.

Conversely, conservative investors should wait for clearer signs of sustained profitability and reduced exposure to non-core risks.

Conclusion: A Turnaround in Progress

Koh Brothers Eco Engineering's H1 2025 results signal a meaningful shift in trajectory, supported by a robust order book and improved cost management. However, the stock's 94% discount to fair value reflects lingering skepticism about its ability to sustain profitability in a volatile sector. While the valuation gap presents an intriguing opportunity, investors must weigh the risks of legal exposure, currency fluctuations, and sector-specific challenges.

For those willing to take a calculated bet, this Singapore construction stock could offer asymmetric upside—if the company's recent momentum proves durable. But patience and close monitoring of project execution and earnings reports will be key.